Six months ago today the S&P 500 hit its lowest point in twelve years. Since that point, in just half a year, the market has rallied back about 50% from that low point with remarkable breadth and consistency. The conventional wisdom holds that the stock market leads the economy out of recessions by at least 6 months, and if that is the case we are in the sweet spot for real economic recovery. Personally, I will be closely watching consumer spending trends for confirmation of such improvement.
There have been two interesting bits of news coming from the Federal Reserve over the last couple of days that seem to be pertinent. On Tuesday, the Fed released its monthly report on consumer credit. The month of August saw a record decline in the amount of credit available to consumers of nearly $22 billion. The sixth straight monthly drop was more than 5 times the amount analysts had expected, and represents a 10% decline annually. Interestingly, the bulk of the declines of $15.4 billion was from non-revolving credit such as loans on cars (not real estate), despite the boost in auto sales provided by the government’s Cash for Clunkers program.
It is clear that after the estimated $14 trillion of wealth lost over the last few years, households are forced to constrain spending. Undoubtedly, the rising unemployment rate is a major cause of this phenomenon as well. Even those consumers who still have their jobs are worried about the future and are finding more reasons to save for a rainy day rather than spend. Likewise banks have become more risk averse amid very high but improving delinquency rates.
“Revolving credit may shrink by another 20 percent by the end of next year as banks pare credit lines further and more consumers turn to debit cards to pay their bills, said FBR Capital Markets Inc. analyst Scott Valentin.
Consumer spending growth will average almost 1.5 percent in the second half of this year, according to a Bloomberg News survey of economists conducted in the first week of August, after falling by an average 0.2 percent in the first half. They also forecast the jobless rate would average 10 percent in the first quarter of next year.
Economists in the survey didn’t see annual growth in consumer spending topping 2 percent until 2011, even as they forecast the economy to return to growth in the second half of this year.” — Bloomberg.com
If you ask me, the two statements above are tough to reconcile. Revolving credit will continue to decline at a very rapid pace, and yet economists anticipate about 1.5% increase inimage consumer spending. That is due in part to the horrendous sales results amid the financial crisis last year. That being said, buying power has not gotten better since then and we see serious headwinds to spending for the rest of the year. For better or worse, the U.S. consumer has utilized credit over the years to enhance liquidity and buying power. Now with that source of funding shrinking at an extremely rapid rate, we are skeptical of the economists predictions.
The Fed released their Beige Book today, and while they said that consumer spending in August was roughly flat thanks to back to school shopping, they said that they see a general “firming” in most districts. Knowing that the consumer comprises 70% of the U.S. GDP, the trends in consumer behavior are distressing. Is the Fed suggesting we are in the midst of a consumer-less recovery?
We are quickly approaching the all important holiday shopping season, and it will set the tone for 2010. If the economy turns downward it will be because of risk averse bank lending and cash-strapped consumers, but if the rally continues full steam ahead it may be in spite of those same trends.